Douglas Dynamics, Inc.

Good day and thank you for signing by. Welcome to the Douglas Dynamics fourth quarter 2021 earnings conference call. At this time, of course, suspense on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star zero. I would like to hand the conference over to your speaker today, Sarah Lube-Balbert. Please go ahead.

Thank you. Welcome, everyone, and thank you for joining us on today's call. Before we begin, I'd like to remind you that some of the comments that will be made during this conference call, including answers to your questions, will constitute forward-looking statements. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we have described in yesterday's press release and in our filings with the SEC. Joining me on the call today is Bob McCormick, our President and Chief Executive Officer. In a moment, Bob will provide an overview of our performance, then I'll review our financial results and guidance. After that, we'll open the call for your questions. With that, I'll hand the call over to Bob.

Thanks, Sarah. Good morning, everyone. I'll start with a quick review of the quarter. Attachments knocked it out of the park. Strong demand and equally strong execution from our team produced great results. Solutions segments also seen strong demand, but performance continues to be stymied by external headwinds. Despite the difficult and unusual circumstances in 2021, our teams have endured and adapted to the ever-changing conditions. driving incremental continuous improvement initiatives while remaining focused on serving our customers. Looking back over the past two years from the emergence of the pandemic in the US, the first 12 months was health and safety focused, adapting to the unprecedented situation, putting protocols in place, and getting back to work. The second 12 months saw the economic fallout from the first 12 months hit home. all while still dealing with new variants and surges of the ongoing pandemic. As we enter the third year of disruption, we believe the pandemic and the related economic headwinds will start to dissipate, but the exact timing is the big question. The factors impacting performance are similar to the issues faced by many sectors and companies today. Inflationary pressures, supply chain constraints, and labor shortages. Prices for raw materials, components, and products we source continue to rise with inflation at 40-year highs. Those who track and predict chassis supply indicate 2022 will produce a similar number of chassis to 2021, with supply remaining very tight in the first half, then starting to show some improvement in the second half of the year. The Omicron surge also led to an increase in absenteeism in the month of December. That continued in January, but like the rest of the country, the situation has dramatically improved recently. Finding and keeping skilled employees continues to be a challenge, but our team has seen success with initiatives put in place last year and by raising compensation for shop floor associates. The good news is demand trends remain strong across both segments, and with record backlogs, we are primed and ready to execute as macroeconomic headwinds subside. Additionally, we've got a number of new product launches scheduled for the back half of 2022 that will help drive profitable growth in both segments in 2023 and beyond. Let's talk about the segments in more detail. First, attachments. The team produced a strong fourth quarter, which capped off a tremendous year for the segment. Record net sales increased 18%, outperforming Q4 2020, which was a good quarter despite the pandemic disruptions. There were several factors driving these results. Strength in retail activity, dealer and end-user optimism, pricing actions taken during the year, and the continued expansion of our non-struck product offers. Results were even more impressive given the snow season started off very slow in the fourth quarter, with snowfall totals well below the 10-year average. Things improved in January with multiple large storms impacting major metropolitan areas across the Midwest and the East Coast. If these trends continue, by the end of March, we hope to see season totals near average, plus or minus 5%. There is one additional positive factor I will mention now, and you will hear us talk about more later this year, and that's changes in the industry leading to increased demand for non-truck products and ice control equipment. Essentially, we are seeing increased demand for snow and ice control equipment of our non-truck products, namely on UTVs and ATVs. A wide array of end users from traditional landscapers to to maintenance crews on campus environments such as hospitals, universities, and other complexes that need pathways and sidewalks cleared quickly and efficiently in places where foot traffic during snowstorms creates a safety hazard. Historically, these areas were cleared manually. Over the past few years, end users are beginning to migrate towards non-truck equipment, which are more productive and efficient, creating a growth opportunity for Douglas. Keith Hagelin, Mark Van Genderen, and the entire attachments team continue to deliver outstanding financial performance while meeting and exceeding their customers' expectations. Turning to solutions. Supply chain and inflationary headwinds that have been impacting many sectors of the economy continue to disrupt solutions, hindering our ability to upfit work trucks efficiently. For the quarter, net sales declined compared to prior year due to the continued disruption of chassis and component supply. With lower volumes moving through our up-fit business model, profitability was impacted significantly in Q4. However, it's important we keep our skilled workforce intact as we see the backlog we have to address despite the near-term impact on margins. As we look ahead into 2022, the dramatic reduction in Q4 chassis supply, particularly for Class 8 trucks, means more of our planned upfits were pushed out into the first half of 2022. And with inflation at 40-year highs, the cost of completing these upfits will put pressure on near-term margins when these trucks are eventually built and shipped. To help mitigate this risk, we've been renegotiating price with some customers on these delayed shipments. We've had good success on repricing commercial orders at DeJana, but the municipal contracts at Henderson are harder to address. DeJana and Henderson remain strong, and we are continually breaking backlog records, a testament to the strength of our brands, products, and our leadership teams and solutions. As I mentioned earlier, the velocity of trucks moving through our upfit business model significantly impacts profitability. Assuming chassis flow starts to improve in the second half of the year and we begin moving backlog through our upfit facilities, good things will start to happen. The fact is we know we can upfit and deliver great work trucks for our customers at a fair price that is also profitable for Douglas. Just one year ago, Solutions turned in a great fourth quarter before the supply chain disruption began, an important reminder of how they can perform when demand and supply align. Once the headwinds dissipate, we are confident that our diligent execution and improvements made in recent years will drive profitable growth, as predicted, and put us back on track to deliver our long-term financial targets. With that said, I'd like to mention recent actions taken at Henderson regarding our municipal upfit facilities. As you may remember from our January 2021 investor event, we completed a thorough and game-changing upgrade to our Huntley, Illinois, upfit facility. The results were impressive. Utilizing DDMS, we increased efficiency, throughput, and productivity. When chassis supply began to soften in the second half of 2021, our Henderson leadership team made a bold move, deciding to replicate the Huntley process improvements at three other Henderson locations across the country. This was a heavy lift, but the team successfully completed these improvements in Q4. The great news here is that when chassis flow improves and we start to work through our strong backlog, we're positioned to meet customer demand through these four highly productive, efficient upfit facilities, allowing us to close two of our upfit operations, driving fixed costs out of our business model. This is clearly a good example of how we plan to exit this situation in a stronger position than we entered it. With that, I'll turn to our capital allocation priorities. Of course, we remain committed to the dividend and increased it again this year, as we have before in both good times and bad, to 29 cents per quarter. This remains our top priority going forward. Additionally, given our consistently strong free cash flow production, we are initiating a stock repurchase program of $50 million. Looking ahead, we are hoping to see one of the blue chip companies on our target list become available, but aren't seeing many near-term M&A opportunities to pursue today. In the meantime, we continue to build relationships and conduct due diligence on the logical opportunities that come our way. Looking back at 2021, I'm grateful for the drive and dedication demonstrated by our team, who have used creativity and imagination to adapt to the constantly changing circumstances all with an eye on improving our position in operations over the long term, plus showing a willingness to put their heads down and grind it out when necessary. While the series of unpredictable challenges we have faced over the past two years are likely to continue in the near term, we are confident in our long-term potential. I firmly believe when external headwinds turn to our favor, combined with the operational improvements we have implemented in recent years, we will be ready to deliver. driving towards long-term financial goals, which Sarah will discuss later, clearly exiting the pandemic stronger than we entered. Now I'd like to pass the call to Sarah.